South Korea Sets $20 Billion Annual Cap on Cash Investment [Gyeongju APEC]

On the 29th, South Korea and the United States resolved uncertainty by reaching a tariff agreement centered on a $350 billion (approximately 500 trillion won) "U.S. investment package." The two countries, which had failed to narrow their differences over key details, reached a final conclusion during the South Korea-U.S. summit held on the sidelines of the Gyeongju 2025 Asia-Pacific Economic Cooperation (APEC) summit.

According to the outcome of these negotiations, South Korea will invest $200 billion in the United States in cash (equity) with an annual cap of $20 billion, while the remaining $150 billion will be invested through a mix of cash (equity) and guarantees under the so-called "MASGA (Make American Shipbuilding Great Again)" project, led by South Korean companies to promote shipbuilding cooperation. The profit-sharing ratio will be 50:50 between South Korea and the United States until the principal is recovered. South Korea succeeded in ensuring that payments would be made in installments to minimize shocks to the foreign exchange market, while the United States agreed to change the profit-sharing ratio before principal recovery from the previous 90:10 to 50:50 for both countries.

President Lee Jae-myung and U.S. President Donald Trump are seen conversing as they move to the summit venue at Gyeongju Museum in Gyeongbuk on the 29th. (Provided by the Presidential Office) Photo by Yonhap News

원본보기 아이콘

Kim Yongbeom, Chief Policy Officer, revealed these details during an emergency briefing at the Gyeongju APEC International Media Center (IMC), stating, "South Korea and the United States reached a final agreement on the details of the tariff negotiations on the 29th." The comprehensive memorandum of understanding (MOU), which includes security negotiations focused on alliance modernization as well as trade issues, is expected to be finalized within two to three days. The investment commitment is valid until January 2029.

South Korea will maintain the $350 billion investment amount, which was a major point of contention, but will set an annual cap of $20 billion to mitigate shocks to the domestic foreign exchange market. The United States, which had initially demanded an upfront cash payment of $350 billion, accepted the persistent persuasion of the South Korean negotiation team. The amount of foreign currency South Korea can raise in a year without impacting the foreign exchange market is estimated at $15 billion to $20 billion. Even the annual $20 billion will be paid through a capital call method, meaning funds are provided only upon request, not as a lump sum. Kim explained, "The $200 billion investment will not be made all at once, but in line with project progress and within the annual $20 billion limit, so it is within the capacity of our foreign exchange market," adding, "We have also established a separate basis to request adjustments to the timing and amount of payments if there are concerns about shocks to the foreign exchange market."

The "MASGA" project related to shipbuilding cooperation will be led by South Korean companies and will include loans and guarantees. When introducing new shipbuilding orders, long-term financing will be used to raise funds, thereby reducing the burden on South Korea's foreign exchange market and increasing the likelihood of South Korean companies winning orders. Kim stated, "The $150 billion for the shipbuilding sector will be treated as foreign direct investment (FDI), with loan guarantees provided through domestic and foreign commercial banks, so the actual burden on the foreign exchange market, including ship finance, is expected to be very limited."

Although the investment commitment is valid until January 2029, actual funding is expected to be spread out over the long term. The investment funds will actively utilize returns from foreign currency assets. Kim said, "The returns from managing foreign currency assets are not insignificant," adding, "Interest, dividends, and other returns can be used to a considerable extent." He emphasized again, "With an annual cap of $20 billion, we believe a substantial portion can be covered by our foreign exchange reserves, so there will be no new shocks to the domestic foreign exchange market."

원본보기 아이콘

Until the principal is recovered, profits from the investment will be shared equally between South Korea and the United States. The United States had insisted that if the cash investment ratio was lowered and payments were made in installments, the profit-sharing ratio before principal recovery should be changed from the original 90:10 to 50:50. South Korea has effectively accepted this demand from the United States.

However, if it appears that South Korea will not be able to recover the full principal and interest within 20 years, the profit-sharing ratio can be adjusted. Investments will only be made in commercially viable projects where the principal and interest are guaranteed, and this principle will be specified in the documentation. Commercial rationality is defined as a judgment by the investment committee, in good faith, that the project guarantees sufficient cash flow to recover the investment. Furthermore, an umbrella structure has been established so that if a loss occurs in one project, it can be offset by gains in others. Kim also stated that a safeguard has been secured to allow for further negotiations with the United States if unilateral investment demands are made contrary to prior agreements.

Semiconductor tariffs will be adjusted to ensure they are not less favorable than those of competing countries such as Taiwan, and most-favored-nation status will be applied to pharmaceuticals and timber. Kim explained, "Tariffs on automobiles and parts will be reduced to 15%, and mutual tariffs will be maintained at around 15%. Semiconductor tariffs will be adjusted to a level that is not less favorable than that of Taiwan, a competing country." He added, "For certain items such as pharmaceuticals and timber, most-favored-nation status will be applied, and some aircraft parts and pharmaceuticals will be exempt from tariffs. The MOU will specify a mechanism for the recovery of the principal of U.S.-bound investments in accordance with the principle of commercial rationality."

The tariff reduction will take effect on the first day of the month in which the legislation to implement the agreement is submitted to the National Assembly. Kim stated, "We intend to submit the bill to the National Assembly by mid-November, and if the two countries reach an agreement, the tariff reduction will be retroactively applied from November 1." He also emphasized that there would be no additional opening of the agricultural market. Kim said, "We have thoroughly defended against additional market opening in the agricultural sector, including rice and beef. We have agreed to strengthen cooperation and communication between the two countries regarding quarantine procedures."

Regarding the dramatic conclusion of the tariff negotiations, Kim stated, "I don't think we made any concessions." When asked whether it was South Korea or the United States that made concessions during the negotiations, he replied as such. Kim added, "It's difficult to comment on the other side's position during the negotiation process," but also said, "President Lee Jae-myung said so himself, and we would not have made concessions in just a few days."

In an interview with Bloomberg on the 24th, President Lee stated, "The United States should not maximize its own interests to the extent that it would cause catastrophic consequences for South Korea," and "A delay in reaching an agreement does not necessarily mean failure, so I ask for your patience." Given these remarks, there was widespread speculation that a tariff agreement would be difficult to reach at the South Korea-U.S. summit.

Kim emphasized, "As I have repeatedly said, President Lee would never neglect the national interest because of timing," adding, "We acted according to that principle." He further explained, "Even on the evening of the 28th, the outlook was not bright, but things progressed rapidly on the day itself."

Experts evaluated that the agreement represents a compromise between the positions of the two countries, and that the "annual $20 billion" is within South Korea's capacity. Min Jeonghun, a professor at the National Research Institute, said, "Since the issue could not be resolved at the working level, the two leaders met and reached a broad agreement. The amount was set at $20 billion to accommodate the U.S. position on installment investment, and the period was extended from eight to ten years, reflecting South Korea's position as well, so it is a fully compromised plan."

Koo Kibo, Professor of Global Commerce at Soongsil University, commented on the installment investment amount, saying, "Although it is higher than the $7 billion to $15 billion proposed by South Korea, considering that the investment amount was $20 billion and $30 billion for two consecutive years, it is certainly within our capacity." However, Professor Koo expressed concern about profit sharing, stating, "Just before the principal is recovered, profits are to be split 50:50 as with Japan, but after the principal is recovered, although there has been no official announcement, estimates suggest that the United States will take a significant portion."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.